Lenovo Group Limited (992) Earnings Call Transcript & Summary

Good morning, good afternoon, and good evening. Welcome to Lenovo's earnings webcast. This is Lixi Yuan, Director of Investor Relations at Lenovo. Thanks, everyone, for joining us today. Before we start, let me introduce our management team joining the call today. Yuanqing Yang, Lenovo's Chairman and CEO; Winston Cheng, Group CFO; Luca Rossi, President of Intelligent Devices Group; Ashley Gorakhpurwalla, President of Infrastructure Solutions Group; Ken Wong, President of Solutions and Services Group. We will begin with earnings presentations. And after that, we will open the call for questions. Now let me turn it over to our Chairman and CEO, Yuanqing Yang. Yuanqing, please?

Hello, everyone, and thank you for joining us today. I'm pleased to share that the Lenovo just delivered the best quarter in our entire history. Record revenue, record adjusted profit and the record ARR momentum. This once again validates our strategic growth value and the strength of our execution. Powered by our hybrid AI strategy, operational excellence and relentless innovation, we are confident in sustaining this growth momentum and driving long-term profitability. . Let's start with the growth level. We delivered a record revenue of USD 26.9 billion, up 43% year-on-year. Adjusted net income exceeded the $1 billion milestone for the first, up 176% year-on-year, with adjusted net margin significantly improved by almost 2 points year-on-year. Equally important, all business groups delivered strong double-digit revenue growth as a new fiscal Q1 record. And our geographies delivered a strong revenue growth ranging from 25% to 58%. With the consistent execution of our hybrid AI strategy, AI-related revenue accelerated to over USD 9 billion, up 60% year-on-year, now accounting for 35% of group revenue. At the same time, we continue to invest in innovation with R&D expenses up 30% year-on-year. Beyond the impressive numbers, I want to highlight the 3 historical breakthroughs worth attention. First, building on our position as a market leader in PC and smart devices, we are becoming global AI infrastructure leader as well. The last order of momentum of ISG, our infrastructure solutions business proved that it has truly become a growth and profit engine level. Our continued focus on investing in ISG's transformation, refining its business model and strengthening its capabilities has paid off. This has well-positioned ISG to capture the search in AI infrastructure demand. Second, and the only official technology partner of the FIFA World Cup 2026, we delivered the AI technology and solutions at the scale never seen before. Three countries, 16 cities, 104 matches, a compelling proof point for AI democratization in action. We successfully elevated our brand from PC leader to AI leader. And through the incredible global platform, we significantly strengthened our customer relationship. Third, we accurately anticipated the supply shortages and the cost increases. Through our scale, our resilient global supply chain building on our global local model and strong supply relationships as well as agility and the efficiency of our end-to-end self-controlled operating model, we successfully turned those industry-wide constraints into competitive advantages. This not only demonstrates our ability to see the opportunities to validate our differentiated strength. These results go beyond just the beating expectations. The market is increasingly recognizing that our strategy is working. Our transformation and our performance is built to last. AI is now embedded in our products, services, operations and innovation. It is delivering value for our customers while reshaping our processes and driving tangible growth across our business and the bottom line. Now let's look at each business group in more detail. IDG or intended device group delivered an exceptional quarter despite the significant market headwinds. For our PC and Smart Devices business, we achieved a record fiscal Q1 revenue up nearly 30% year-on-year with the industry-leading profitability. We further strengthened our PC leadership, extending our lead over the #2 player for the tenth consecutive quarter by more than 5 points -- in revenue surged more than 80% year-on-year, and our smart business delivered its best-ever fiscal Q1 revenue, up 15% year-on-year. Now let's turn to ISG, Infrastructure Solutions Group. Last quarter, when ISG returned to profitability, many asked was that a one-off, can this profitable growth be sustained. This quarter, ISG gave a clear answer. Not only can it be sustained, but the momentum is also even stronger. ISG nearly doubled its revenue this quarter at USD 1.5 billion. Operating profit reached close to USD 708 million with operating margin exceeding 9%, surpassing the previous quarter's record highs. This is a result of continued investment in cloud, edge, particularly AI inferencing which enables us to capture the booming -- economy and empower our customers agentic transformation. Our new strategy in CSP or cloud service provider in the enterprise and SMB continues to drive extraordinary growth across both segments. Both CSP and the ESMB revenue nearly doubled year-on-year. At the same time, we drove strong momentum in both traditional and AI compute. In traditional compute, we rose to #2 in the global x86 server market with profitability, accelerating record. In AI compute, our AI server pipeline grew to USD 54 billion, more than double from the previous quarter. SSG, Solutions and Services Group delivered another outstanding quarter with revenue up 28% year-on-year to USD 2.9 billion. And operating margin up 2 points year-on-year to 24%. Management services and the projects and solutions together accounted for over 62% of SSG revenue reaching a new high. As the recently concluded FIFA World Cup, we delivered zero-fault execution at a massive scale from front-end applications like FIFA AI Pro, Referee View AI Stabilizer and 3D Player Avatars to our AI-powered command center working behind the scenes to manage value operations across the tournament. But what excites us more is the big picture of AI democratization. We are taking these capabilities such as the real-time data processing and AI bot analytics and extending that deeper into our force. We are also scaling that across broader industries like the smart cities and manufacturing, turning private data into tangible business value. And this is already reflected in our performance. Our TruScale business grew 35%. Our AI -- 15% revenue growth in projects and solutions. Looking ahead, our mission is clear, bringing AI to every individual under every enterprise. On personal AI, we are building AI super agent, Qira globally and Tianxi in China. They are cross trained across devices and ecosystems. And with context awareness and the privacy protection as the foundation that deliver truly personalized, continuous and proactive intelligence for individuals. Our enterprise area, we are helping customers turn private data into insights and business value powered by the Lenovo hybrid AI Advantage framework. Through years of consistent execution of our hype AI strategy, we are fully prepared to see the tremendous opportunities of AI democratization. Before I go, let me reiterate this quarter has once again product, we not only deliver on our promises, but also have the capability to sustain the delivery. Operational excellence under -- innovation are our foundation, clearly see -- strong execution are our engine. They enable us to not only navigate market cycles, but to seize the opportunities and win. Earlier this year, we set a goal to reach $100 billion in revenue in 2 years. Given the momentum we have built in Q1, I'm confident we are ahead on schedule and on track to achieve it sooner than planned. Thank you. Now let me turn it over to our CFO, Winston. Winston, please.

Thank you, Yuanqing. I'm pleased to walk you through Lenovo's results for the first quarter of fiscal year '26-'27. This was a quarter that delivered our strongest performance on record with all-time high revenues and adjusted net profit. We delivered first quarter revenue of $26.9 billion, up 43% year-on-year, marking the highest growth in the past 5 years and delivering the strongest quarter in the group's history. AI-related revenues grew 60% year-on-year and now represent 35% of group revenues. Led by our hybrid AI strategy, we're in a unique position to capture AI opportunities with comprehensive business portfolio spanning devices, infrastructure and services underpinning our broad-based performance in the first quarter. All 3 business groups delivered record first fiscal quarter revenues and operating profits bringing the group's adjusted net profit to an all-time high. In IDG, we strengthened global PC leadership and widened the gap over the next player. While profitability remains stable despite a challenging operating environment with ongoing component supply demand imbalances impacting component costs. The smartphone business delivered double-digit year-on-year revenue growth. In ISG, revenue reached record high with both CSP and ESMB revenues nearly doubling year-on-year and operating margin expanding to a record 9.1%. SSG achieved record revenues and continue to expand its operating margin. Adjusted operating income increased 141% year-on-year to $1.5 billion, while adjusted net income grew 176% year-on-year to $1.1 billion, surpassing $1 billion milestone for the first time. Adjusted operating and net margins expanded to 5.7% and 4%, respectively, supported by higher revenue scale and continued efficiency gains. Reported net income was a loss of $609 million primarily due to the $1.7 billion non-cash value loss from warrant revaluation driven by strong share price performance during the first fiscal quarter, a $30 million notional interest from the convertible bonds. After adjusting for these noncash and nonoperating items, adjusted operating and net income results provide a better connection of the operating results of the group. Now I'll walk you through the key highlights of our business groups. IDG delivered a record first fiscal quarter revenue of $17.1 billion, up 27% year-on-year. Operating profit also increased 27% year-on-year to $1.2 billion, while maintaining an industry-leading operating margin of 7.1%, reflecting our operational excellence, supply chain resilience and continued innovation. Our global PC market share reached 24.2% in the first fiscal quarter, widening our lead over next player for a tenth consecutive quarter. We sustained market leadership across commercial and consumer segments and delivered a record first fiscal quarter high AIPC global market share of 25.1%. Against a challenging operating environment, Lenovo was the only one of the top 3 PC vendors to gain more share during the quarter by maintaining stable profitability. Our non-PC adjacencies delivered double digit revenue growth driving further premiumization and enhancing our portfolio mix. In smartphones, Motorola delivered the highest first quarter revenue since 2015, wind -- by double digit year-on-year growth and achieved a record premium revenue mix of 37%. A core competitive advantage for Lenovo is our broad and comprehensive device ecosystem, spanning PCs, tablets, smartphones, workstations and other smart devices. Over the past 2 years, we have rapidly scaled our smartphone space delivering 12.4% 2-year CAGR, significantly outpacing the overall device market over the same period. We continue to gain market share in our AI PC premium smartphones, which builds the foundation for us to deliver our personal AI vision and scale. Looking ahead, we continue to drive growth and profitability through scale advantages, premiumization and new monetization opportunities agencies and other AI devices leveraging our global brand recognition and distribution capabilities. ISG continued to accelerate revenue growth with significant margin improvement. Revenue increased to a record $8.5 billion, up 98% year-on-year. Operating profit reached a record $777 million, driving operating margin to an all-time high of 9.1%. As demonstrated by our strong revenue growth and expanding profitability over the past several quarters, we're confident in our ability to be a global AI infrastructure industry through our differentiated ODM+ strategy and unique end-to-end operating model providing sustainable competitive strength. We saw broad-based strength across traditional compute AI servers and storage. Excluding the impact of international GPU sales in China in the prior year, global AI server revenues delivered triple-digit year-on-year growth. Our AI server pipeline expanded to $54 billion up 157% quarter-on-quarter, driven by accelerating AI infrastructure momentum and a rapidly expanding customer base. We've also expanded our North Carolina smart campus adding meaningful new server manufacturing capacity to capture rising demand from hyperscalers and enterprise customers. This expansion reinforces our commitment to our global local approach, a key advantage we have built over the years to deliver greater efficiency, agility and speed. The exceptional results reflect the success of our engine business model with both CSP and rise SMB revenues nearly doubling year-on-year. Our strength in go-to-market capabilities and leading technologies including Neptune liquid cooling systems are driving higher-value opportunities and accelerating profit growth. Through our deepening strategic partnership with ecosystem leaders, including NVIDIA, AMD and Intel, we are scaling our AI infrastructure portfolio to capture opportunities across both training and inferencing workloads. We are also scaling GB300 to capture growing AI demand while accelerating Vera Rubin rack solution readiness and time to market. At the same time, AI adoption among enterprise customers is gaining meaningful momentum. Our enterprise and SMB business is strategically positioned to capture the growing AI inferencing opportunity, leveraging a scalable transactional model and simplify prevalidated enterprise solutions. Our momentum in AI infrastructure continue to drive customer wins across CSP, enterprise and SMB underpinned by the strength in our unique ODM+ model, global operating scale, supply chain agility and leading liquid cooling technology. In CSP, we delivered an AI factory with over 7,000 GPUs for a leading AI cloud provider and supported rapid AI expansion of another AI infrastructure provider with deployment of thousands of servers. In Enterprise and SMB, we helped an enterprise AI innovator to reduce model training and inference time by 70%, while enabling another AI video analytics provider to deploy intelligence edge AI operational platform and an in security through real-time analytics and cost-effective deployment enabled by our Neptune Liquid Cooling solutions. We deliver high-density AI factory solutions with 18.3 exaflops of performance, while also helping a leading university to build high-performance computing platform with improved energy efficiency enabling scientific research at scale. These wins reinforce Lenovo's position as a leading AI infrastructure partner or customer and the strength of our execution across diverse segments. Turning to SSG. SSG delivered record quarterly revenue of $2.9 billion, up 28% year-on-year, with operating profit increasing 39% year-on-year to $697 million and operating margin expanding to a record 24.2%. AI services revenue grew at triple-digit year-on-year driven by accelerating customer adoption and higher returns from their AI investments. Revenue mix for Managed Services and Project & Solutions expanded to a record 62.4% of SSG revenues. Bookings in TruScale Infrastructure-as-a-Service delivered hyper growth driven by AI factory success across both AI cloud and enterprise customer segments. Projects & Solutions revenue growth gained momentum supported by a robust multi-quarter booking backlog. SSG is strategically positioned in the fast-growing segments defined by AI solutions and services. During the quarter, SSG continued to outperform the market, growing near twice the market growth rate. AI is fundamentally expanding SSG's addressable market, adding over $200 billion of incremental opportunity in this fiscal year alone. We expect total SSG TAM to grow to more than $850 billion by fiscal year '29, '30, with AI-led cap growing meaningfully faster and doubling over the same period. Through its full stack enterprise AI framework, SSG brings together infrastructure, platforms, services and industry solutions to help customers move from AI experimentation to production. To conclude, this quarter's results highlights and build on Yuanqing's comments about the FIFA World Cup. I would like to add more color on how Lenovo's full stack AI capabilities were deployed at global scale and the impact this partnership delivered. We delivered 99.99% solution uptime across all tournament operations while deploying and managing more than 25,000 Lenovo and Motorola devices across more than 600 FIFA sites. This partnership also became a power platform for customer engagement. We hosted 16,000 guests throughout the tournament, including Fortune 500 CEOs, investors partners and customers, creating meaningful opportunities to deepen relationships and showcase our innovation firsthand. The brand impact has been significant. The tournament generated billions of social media impressions and tens of thousands of media stories, and we're outperforming share of voice among all FIFA partners, a powerful new platform for telling the story of Lenovo AI at global scale. Our strategy is clear. Our execution is focused and disciplined. This quarter's results on the back of a record fiscal year marked by record revenue, record profitability and AI-related revenue that now represents 35% of the group are not just a onetime event, they reflect the compounding effect of our clear strategy, capabilities we have built over decades and execution across every business group and geography. With our global scale, operational excellence and innovation leadership, we are converting growth into higher shareholder -- as we enter an accelerated era of AI-driven growth, we remain confident in ability to sustain this momentum and deliver durable, profitable growth with even greater resilience and executional strength. We are confident in our ability to deliver the $100 billion revenue target in the near term and are on a strong path towards achieving a net income margin of over 5%. We will now answer any questions you may have.

[Operator Instructions] While we're waiting for the questions, allow me to introduce the management team again. Other than our Chairman and CEO, on Yuanqing Yang; our CFO, Winston Cheng, we also have the following business leaders with us today for Q&A. Luca Rossi, President of Intelligent Devices Group; Ashley Gorakhpurwalla, President of Infrastructure Solutions Group; and Ken Wong, President of Solutions and Services Group. Now we will open the floor for questions.

The first question we received from the question list is from Tony Zhang from CLSA. Asking for our 3 to 5 years target of USD 130 billion revenue target and 5% plus net margin target. What would be the key drivers for the business scale growth and margin expansion. We received a similar question from Paul from Morgan Stanley. What is the main driver to get to the 5% plus net margin target? Is this mainly driven by profit improvements from IDG, IHG or SSG. May I please invite our Chairman and CEO, Yuanqing, to address this question, please.

Thank you. Thank you for the question. So our strong Q1 performance is a clear testament to our sustainable revenue profitability growth. In my view, our ability to sustain long-term growth going forward comes from the following areas. First strategy and strong execution as our engine. We firmly believe the broad direction of AI is just the beginning. We are in the AI infancy era, which will consume even more computing power than -- and private AI on personnel and enterprise private data has barely begun. That tach share AI demand will only grow stronger with our hybrid AI strategy and strong execution, we are confident in capturing this enormous opportunity. Actually, our years of investment and transformation are already paying off. AI is not a clear growth engine across every business group. IDG, ISG and SSG, all delivering strong double-digit year-on-year growth with improved profitability. Our AI revenue accelerated to more than $9 billion now -- last quarter now accounting 35% of global total revenue. Second, our operational excellence is our foundation. Our scale with our full stack product portfolio from every category of AI devices and the infrastructure, our resilient global supply chain build on our global model, diversified sourcing strategy under strong supply chain -- supplier relationships as well as the agility and the efficiency of our end-to-end self-controlled operating model consistently turn the challenges into opportunities despite the market volatility. Finally, our relentless innovation spend, both personal AI and the enterprise AI. On personal AI, we are driving our vision of one personal AI on multiple devices with the launch of Qira. On enterprise AI, not only our continuous investment on liquid cooling, on edge computing on inferencing have helped our ISG to deliver strong momentum. We are also helping customers to turn private data into insights and business value powered by the Lenovo Hybrid Advantage framework. In summary, the market tailwind certainly helps. But the Lenovo's results are far more than just riding the trend. It's the accumulated results of our foundation built over the years enables us to not just navigate marketing cycle, but to seize the opportunity and win. Thus, we are confident to sustain the growth and the profitability improvement. Actually, as I said in the opening. So we are -- so at the beginning of the fiscal year, we communicated with you. So we want to achieve JPY 100 billion yearly revenue in 2 years. But with the strong momentum in Q1, we are ahead of schedule. So we are ready to deliver that in this fiscal year and driving to even higher profitability.

Thanks, Yuanqing. Thank you very much. So just on this topic, may I please also invite our Group CFO, Winston, to add your comments. Winston, please?

Yes. Just in terms of the path to obviously, the TAM that we have both for the IDG, but also in particular, ISG business. And we're not even addressing the new acquisition of the storage market, which we added a $38 billion TAM to it, position us well for long-term growth in excess of the number that we're quoting right now. But in terms of the path to that 5%, as you can see, historically, we've relied a lot on PC today. ISG is becoming a very meaningful contributor and is growing continuously in terms of both revenues, but more importantly, we're growing as a group faster on the profit front. So from that perspective, I think it sets up in a natural course for margin expansion. And of course, that's before our full ramp-up on the SSG business as well, which we'll share in the coming quarters.

Thank you, Winston. The next question is really we have received some various analysts and investors asking, how do we expect memory pricing and costs to trend through the second half and into the next year? So what are the opportunities and risks do we see this creating for our business groups and for the group overall. I think for this question, may I please also invite our Chairman Yuanqing to share your thoughts.

First, as I outlined earlier. So AI as a whole is far from a bubble. So actually, it's just the first stage of AI democratization, as it evolves and becomes more accessible, it will only generate more demand towards AI democratization. And with that, we believe demand for memory will continue to rise for a considerable period ahead. So at least by the end of next year. So that means that the supply will be still constrained. But I think Lenovo is in a better position. So in this environment, our resilient supply chain and the operational excellence will clearly benefit us. . And I believe this is also another key reason why our performance can be sustained over the long term. In my view, it comes from 3 aspects. First is our scale. So we have full-stack product portfolio from every category of AI devices to infrastructure. Most of the competitors are either in just the consumer devices or infrastructure, while Lenovo has both. That enables us to operate at a significantly larger scale. I believe Lenovo is now among the global customers of the major semiconductor suppliers. Second, so our global local model, particularly our diversified sourcing strategy and strong relationships with suppliers across global, not just suppliers in China -- in U.S. in Korea, and in China as well. So actually, we definitely cannot ignore the China supply. So that give us a lot of efficient and cost competitive supply. So actually, this is a supply chain advantage of our globalization strategy we have built over many years. Last but not least, our resilience based on our end-to-end business model. So we are probably a very unique company in the industry. We are not just focusing on branding, marketing sales and service like some of our competitors. But equally strong in in-house R&D. So we operate end-to-end model from product design, demand focused procurement manufacturing all the way to sales and services, combining in-house capabilities with our ODM+ model. So that means that we have control of the entire value chain. So we can react to the market dynamics quickly. So when the material costs rise, we can adjust pricing at the front end in a timely manner. So this is truly another unique advantage. So the supply environment is challenging for everyone, but we have consistently turned that challenge into advantage to grow market share and to improve profitability. So this benefit not just our infrastructure business, but IDG, PC, smartphone tablet business as well.

Thank you so much. We have more questions coming in. And the next question is from Cherry Ma from Macquarie. This question is on IDG. Can you just share updates on the outlook for PC and smartphone for the market and also for Lenovo. Do we see different trends between -- and consumer segments. So for this question, I would like to invite our IDG President, Luca Rossi. Luca, over to you.